News, ideas and a software CEO's thoughts from 25 years in the industry.

It’s The Productivity, Stupid

In a twist on the famous Clinton-era line (“It’s the Economy, stupid”), I submit the truth about manufacturing, as pointed out recently by Mark J. Perry, an economics professor at the Univ. of Michigan, Flint and visiting scholar at the American Enterprise Institute, in a recent Wall Street Journal article.

Perry points out that the average American manufacturing factory worker today “is responsible for more than $180,000 of annual output, triple the output of 1972.”

While it is true that overall manufacturing jobs have declined, output has continued to increase since 1970 (save for recession-related decreases in 2001 ad 2008-09). During every year since 2004, manufacturing output has exceeded $2 trillion (in ’05 dollars), twice the outpt of American’s factories in the early 1970’s. Perry points out that, taken on its own, U.S. manufacturing alone would be the sixth largest economy in the world.

And these increases are the direct result of captial investments in productivity-enhancing technologies.

Critics will say that increased production with fewer workers creates a net negative — fewer auto plant jobs mean fewer paychecks, for example. But they fail to recognize that technological improvements are one of the key factors in economic growth. Tech improvements that lead to higher productivity also portend larger paychecks and a higher standard of living. Displaced workers are disadvantaged greatly, no doubt, but often can and do learn new skill sets in new industries, “and a new generation of workers finds its skills put to more productive use,” notes Perry.

Agriculture provides a fitting model for today’s evolution in manufacturing. The U.S. today produces more ag output than 100 years ago while utilizing just 2.6% of our workforce, compared to 40% back then. Likewise, manufacturing output is double what it was 40 years ago — with about seven million fewer workers.

The critics righly point out the often painful and jarring human costs of such job displacements. It’s reminiscent of the old say that “a recession is when your neighbor loses his job… a depression is when you lose yours.” But the economic truth underpinnning the reality is this: we cannot turn back the clock to a less efficient economy, or lower productivity. That’s not the answer.

The answer is to embrace the technology, cheer the productivity gains, and retrain and educate our workforces to participate in the new economy — one whose dynamism “still supports America’s status as the world’s leading manufacturer.”

And that of course, is where the cheering must lead inevitably to the hard work and difficult choices inherent in the re-education of all those workers. But then again, it is the only way forward.